While most investors remain preoccupied with market volatility, inflation, and global uncertainty, some of the most dangerous threats to a retirement plan lie closer to home. Often overlooked and seemingly harmless, personal and lifestyle decisions can quietly unravel even the most carefully constructed retirement strategy.
In this article, we explore ten subtle but significant threats to your financial independence in retirement.
1. Divorce: A costly uncoupling
Divorce can be financially devastating – particularly for those in their 40s and 50s. Even if amicable, a divorce generally forces both parties to recalibrate their retirement plans that were originally conceived as joint strategies.
From splitting the family home to dividing the retirement assets, the long-term impact on financial stability can be massive. The problem with later-life divorce is that it leaves little time to rebuild wealth or make up funding shortfalls.
Beyond the legal costs of divorce, the transition to single-income living brings higher household expenses and reduced savings potential. Importantly, it’s important to assess the liquidity and tax implications of the assets received in the divorce settlement, as illiquid or tax-heavy assets can compromise long-term financial health.
2. The financial burden of a second home
Owning a holiday home may bring years of joy, but the financial implications can be far-reaching. Maintaining a second property from a fixed retirement income can be burdensome – and the anticipated returns from a future sale may be eroded by poor market timing, capital gains tax (CGT) or high agent fees.
Further, the emotional difficulty of selling a family home can add another layer of complexity that, in turn, can delay financial decisions. If you plan to incorporate the value of a second property into your retirement strategy, be sure to take costs such as maintenance, municipal rates, potential CGT and commissions into account.
3. Choosing the wrong retirement home
Selecting retirement accommodation involves more than just downscaling. Factors such as proximity to medical facilities, social engagement, personal security and assisted living facilities all need to be considered. It’s also important to appreciate that maintaining your own home at age 65 may seem manageable, but the reality at age 80 may be very different.
Options such as sectional title living, share block schemes and life rights villages each carry unique financial and lifestyle implications that should be carefully weighed up before committing, as a poor choice can have long-term consequences not only for your comfort but also for your financial security.
4. Supporting adult children: Love with a price tag
It’s only natural for parents to want to help their adult children, but financial assistance that becomes a habit can quietly drain your nest egg. Helping with a house deposit or business venture is generous, but if it becomes an ongoing dependency, your retirement plan could be in serious jeopardy.
Many parents feel guilt when cutting off financial support, while adult children often assume that their parents have excess funds. Instead of covering recurring expenses for your adult children, consider making one-off contributions such as helping with a car purchase or a family holiday – thereby maintaining your financial independence while still offering support.
Remember, the long-term sustainability of your retirement plan should always take precedence.
5. Longevity: The blessing and the burden
According to Discovery’s research, life expectancy isn’t a fixed number but extends as you age. For instance, once you reach age 65 today, your life expectancy rises to around 84 years, and if you reach 85, it increases to about 91. This highlights a key point: by reaching older ages, you’ve already navigated past early mortality risks – extending your planning horizon.
The downside is that a longer life often means more years living with chronic diseases, age-related illnesses, and/or cognitive decline – the care of which can be costly. Conditions such as Alzheimer’s, cancer, and diabetes are increasingly prevalent, and frail care facilities and home nursing are both expensive and limited in availability.
As such, it’s important to ensure that your retirement plan accounts for the likelihood of needing long-term care, along with medical inflation that continues to outpace inflation by around 4% per year.
6. Using retirement capital to start a business
Many retirees dream of launching a business post-retirement, but the financial risk of dipping into retirement capital can be catastrophic. While staying active and engaged is advisable, funding a new venture should never come at the cost of your long-term financial security.
If starting a business is part of your retirement vision, our advice is to start saving for it well in advance in a separate investment portfolio. This will help ensure that your retirement capital – earmarked to fund living expenses for the remainder of your life – remains untouched.
Furthermore, if you’re still a few years away from retirement, avoid exposing your business capital to high-risk strategies that could jeopardise availability when needed.
7. Philanthropy without a plan
Giving to charitable causes is deeply rewarding, but too much too soon can derail your financial future. Many retirees overestimate what they can afford to donate during their lifetime, forgetting to account for longevity, inflation and unforeseen medical expenses.
In addition, South Africa’s donation tax rules are complex and need to be carefully considered before gifting significant assets. A safer strategy would be to include charitable giving in your will or to establish a donor fund that is separate from your retirement investments. Notably, ensure that your generosity doesn’t come at the expense of your financial well-being.
8. Overly conservative investment strategies
A common error among risk-averse investors is adopting too conservative an investment strategy – particularly in the years leading up to retirement. While capital preservation may feel ‘safe,’ it can prevent your investments from achieving the growth needed to support your lifestyle over decades.
We’ve worked with clients who, with ten years still to go before retirement, were reluctant to move out of money market funds. Paralysed by fear and uncertainty, many ended up sacrificing long-term returns and a more comfortable retirement. A balanced investment approach, tailored to your risk appetite and time horizon, is critical to achieving the retirement lifestyle you desire.
9. Falling for investment scams
Greed and fear are the twin drivers of most investment fraud, and retirees are prime targets. Ponzi schemes, pyramid structures, and advance-fee scams are increasingly rampant and have become increasingly sophisticated with technological advances.
Our advice is to always verify that a fund is registered with the Financial Sector Conduct Authority and avoid any scheme that lacks a credible digital presence, uses generic email domains, or pressures you to invest urgently. If in doubt, seek advice from experienced professionals before parting with your money.
10. The myth of spending less in retirement
The notion that one’s expenses naturally decline in retirement is a common misconception. In practice, retirement spending can often exceed pre-retirement spending due to a range of escalating costs.
Medical expenses – particularly private hospital care, specialist consultations, and chronic medication – continue to rise at rates well above general inflation, with healthcare inflation consistently outpacing consumer price index by 3% to 4% annually.
Other financial pressures could stem from rising utility costs, monthly levies and the outsourcing of home maintenance tasks that may become physically unmanageable over time. As such, ensure that your retirement plan includes generous buffers to safeguard against higher-than-anticipated living costs.
As investors, we tend to focus on the obvious threats, such as market crashes, recessions and political instability, but often it’s the personal, emotional and lifestyle choices that quietly undermine even the most robust financial plans.
In the words of George R. R. Martin, “The unseen enemy is always the most fearsome.” Ensuring that your retirement plan accounts for these less obvious risks can mean the difference between financial freedom and financial fragility in your later years.